We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process:
1) What is the value of my business?
For companies in the PCB/PCBA sector, companies generally sell in the 4−6 times adjusted EBITDA range. Some companies sell for less if they are not profitable or have not been investing/growing; some will sell for more if they are growing rapidly or have something special. Shops at the low range may sell for slightly above liquidation value (net current assets plus fair market value of equipment), which is a major reason why many small shops do not sell. A lot of different factors go into a valuation, and the terms can vary widely as well. The terms generally consist of cash, seller’s note, earn-out, carryover equity, consulting fees/salary, etc. Most deals are completed on a cash-free, debt-free basis as a purchase of assets. Buildings/real estate are usually handled separately.
Most asked follow-up question: What is adjusted EBITDA? EBITDA is earnings before interest, taxes, depreciation and amortization. Adjustments often include normalizing owner’s compensation, adding back personal expenses, adjusting rent if the owner also owns the building, etc. It is also called Seller’s Discretionary Earnings in some cases.
2) How long does it take to sell?
The sell-side process usually takes 9−12 months from the time an intermediary is signed up. It can be shorter if a strong buyer appears early in the process; it can take much longer if the business starts to decline or if there are major issues that come up during due diligence. In the case when a strong, well-financed unsolicited buyer approaches a seller, a deal can take less time, if both parties move quickly and no issues come up.
3) Who are the likely buyers for my business?
Likely buyers are strategic companies in the same or related industry, private equity firms (either as platform or add-on acquisitions), and individuals. Strategic buyers often offer the highest valuation, but they may want to close down the shop or otherwise change the legacy. The best buyers are sometimes strategic buyers who are not the most obvious fit. Private equity firms are fairly prominent in both the PCB and PCBA sectors. They’ll typically look for at least $1 million of EBITDA for a platform acquisition, but will acquire smaller companies as add-ons. Individual buyers are rare for shops with over $10 million of revenue, but common for the $5 million and less level. Foreign buyers are very interested in the U.S. market, although many of them are cautious about having too much military or government business. We always say, “The best buyer might be just down the street, or may be on the other side of the world.”
4) I want to keep it quiet; why should I contact more than 1-2 buyers?
It is best to have a few buyers competing for the business. Not only does this keep buyers honest, but it provides a few backups in case something happens with the primary buyer. The need for confidentiality must be weighed against the extra millions of dollars that competition may bring. That being said, sometimes a well-financed unsolicited buyer is a great buyer. If a buyer is out looking for companies to buy, they have a strategic need to do deals. An owner should be ready to respond quickly if the right buyer comes around.
5) How do we maintain confidentiality?
Intermediaries typically use a blind executive summary to contact buyers, which includes enough information to attract buyers but not enough to allow them to guess who the seller is. NDAs are signed with buyers who express an interest, and the NDA should be reviewed by the seller’s attorney prior to going to market.
6) What is the advantage of using a broker/intermediary?
The main advantages are attracting multiple buyers, negotiating on behalf of the seller, and developing professional materials. One of the main reasons why deals die is because the business starts to decline, and using an intermediary allows the owner to focus on the business. Also, many owners have an exaggerated expectation of value, which an intermediary can help temper. A good M&A firm will review financials and perform sell-side due diligence, which can help uncover issues with the business. Finally, using an intermediary is a strong sign to buyers that the seller is serious.
7) What is due diligence?
Typically, full due diligence begins once a letter of intent (LOI) is signed. The buyer already has a lot of information prior to signing the LOI, and due diligence is used to confirm the information that has been received as well as to uncover any major issues with the business. DD usually takes 60−90 days; it can be shorter if the seller is prepared and the buyer is motivated, longer if any issues come up.
8) We just purchased new equipment; does this increase the purchase price?
It can, as everything is negotiable. A buyer might think that the company was under-invested before buying the equipment, and the purchase just got them up to speed. If the equipment is purchased to expand capacity or services, the benefit of which will mostly accrue to the buyer, then the seller should receive some credit for new equipment. Often with smaller shops, the owners have not been investing, which can be reflected in the purchase price. With larger shops, it is expected that the equipment be on par with the level of business, so the purchase price can be adjusted up or down accordingly.
9) What can we do to increase the value of our business?
Businesses that are profitable, growing, have updated equipment and facilities, a good management team, and are doing something ‘special’ generally have above average valuations. Some of the issues that can hurt valuation are key-person risk, customer concentration, outdated equipment, dirty/disorganized facilities, poor financial reporting, a large portion of plain vanilla products, and a lack of investment in training.
10) When is the best time to sell?
Woody Allen said something like “80% of success is knowing when to show up, 20% is knowing when to leave.” An owner should always be prepared to sell in case a strong unsolicited buyer comes up. The best timing is when the business is doing well, the company is prepared, and the industry and economy are doing well. However, this generally means that others are selling too, and buyers are busy with their business and have a lot of sellers to choose from.
The owner must be prepared personally to sell. For example, the owner’s personal affairs and records must be in order, and key advisors should be consulted (corporate/estate attorney, CPA/tax advisor, wealth advisor). Other stakeholders, such as family, partners, and key employees, need to be on the same page. Also, it is usually a good idea to have a plan for post-closing/retirement activities, as a strong set of goals is good motivation for getting through the sale process.
Good advisors are always glad to further answer the above or other questions. Every business is different, so each owner should contact their own personal advisors.
Tom Kastner is the President of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, FL member FINRA and SIPC. To read past columns or to contact Kastner, click here.